Summary
Orion Office REIT is the result of a spin-off of suburban office properties from Realty Income and Vereit, after these two merged.
As often happens with spin-offs, some of the shareholders that received spin-off shares either could not hold them because of their mandates, or were not interested, driving the price down.
This has resulted in an opportunity to buy shares in an interesting REIT at a really low valuation.
sommersby/iStock via Getty Images Orion Office REIT ( ONL ) is the result of a spin-off of suburban office properties from Realty Income ( O ) and Vereit, after these two merged. As often happens with spin-offs, some of the shareholders that received spin-off shares either could not hold them because of their mandates, or were not interested, driving the price down. For these reasons, spin-offs tend to underperform at first, but then outperform as demonstrated by several scientific papers such as this one . Intuitively, it makes sense since the combination of forced selling by funds that cannot hold the new security, and investors that view it as a special dividend drive the share price considerably below fair value. By buying at this point, alpha can be generated as new investors find the security and the price readjusts to closer to fair value.
Orion’s portfolio is composed of 92 properties with a combined 10 million square feet. It is leased at 94.4%, and generates $175 million in annual base rent. One important risk is that the average remaining lease term is relatively short at only 3.4 years. If the pandemic doesn’t resolve soon and working from home becomes the norm, Orion could have difficulty replacing the expiring leases. Source: Orion Office REIT Investor Relations
The company has a decent diversification in terms of tenant industries, although it has relatively high concentration to the top 10 tenants, which together make ~45% of the annual base rent. Fortunately most of these are investment credit rating tenants and in industries that are likely to keep offices, such as health care and government services. Source: Orion Office REIT Investor Relations
The company is also diversified in terms of geography, with the biggest percentage of rent coming from Texas, New Jersey, and Illinois. In terms of cities, the most important for the company are Chicago, Dallas, and Trenton. Source: Orion Office REIT Investor Relations Business Strategy
Orion’s business strategy is to hold mission critical and/or headquarter locations that have an easy access to commuter routes and public transit. Leasing to companies that are likely to renew, and if it fails, to have the ability to easily replace the tenant. Choosing sites with ample on-site parking and amenities like on-site dining, fitness options, and lobby.
The company plans on generating additional value by performing active asset management, particularly through optimizing the leasing process. Performing capital recycling, and seeking external growth by leveraging the high-quality balance sheet when good opportunities present themselves. Financials
As previously mentioned, most of Orion’s annual base rent comes from investment grade tenants, and the rest generally also comes from solid companies. This is much higher compared with the net lease REIT industry average. Source: Orion Office REIT Investor Relations
This seems like a good time to invest in US single-tenant offices, given their record spread to Baa corporate bonds. Investing in this type of office properties is paying on average 2.7% more than Baa corporate bonds, which seems like a good deal. Source: Orion Office REIT Investor Relations
As part of the spin-off transaction, Orion paid Realty Income a special dividend and took on debt to finance it. In total the company is taking $616 million in debt, most of which is going to finance this special dividend, and with $171 going to debt prepayment. The company will still have a good amount of available liquidity with a $10 million cash balance and $264 million available on its revolving credit facility. Source: Orion Office REIT Investor Relations Valuation
Looking at the most recent 10-Q , we see that the Vereit part of the company had net cash provided by operating activities for the nine months ending September 30 2021 of 79,318,000, while the Realty Income part of the company had 32,295,000. Adding them up an annualizing we get Net cash provided by operating activities of 148,817,333. There were 56,625,650 shares of common stock of Orion Office REIT Inc. outstanding as of November 30, 2021. Dividing operating cash flow by the number of shares we get $2.62 of cash from operations per share. If we assign […]
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